Let's Get Real About Netflix's Numbers
When people assess the financial health of big companies, it’s easy to get lost in numerical minutiae. Let me point out just two numbers for Netflix Inc.: $28 billion and $279 million.
The former is the amount of cash Netflix is obligated to pay in coming years for its streaming video programming, to repay money the company has borrowed, to make lease payments for its offices and more. That sounds like a lot, and it is. Sure, other media and entertainment companies are on the hook for far more money, largely for the expensive endeavor of creating or buying television programming or movies. Walt Disney Co., for example, has committed to spending $92 billion in coming years, mostly to repay debt and from payments it owes sports organizations to televise games.
That takes us to the second Netflix number. That $279 million is Netflix’s highest-ever free cash flow, or the amount Netflix generates from its normal business operations minus what it spends on large projects such as an expansion of its corporate headquarters.
And that peak amount was in 2009, well before Netflix embarked on a global expansion that now means the company’s cash expenses exceed annual incoming cash by billions of dollars. (Netflix does report a profit on its income statement because it spreads out the costs of programming over several years. The $28 billion in Netflix’s contractual obligations is for future programming that’s largely not yet reflected on its income statement.)
In principle, those two Netflix numbers are related to each other. A company tends to rely on the cash generated by its business to pay its bills. But Netflix can’t and won’t pay its own way. At its peak year of free cash flow, it would take Netflix 100 years to pay all the money it has committed to spend. To use Disney as a yardstick again, that company generated an annual peak of $8.72 billion in free cash flow in its fiscal year ended Sept. 30. Its contractually owed payments are about 10.5 times its highest-ever free cash flow.
No one expects Netflix to take a century to pay its bills. Netflix supporters expect the company to grow so large and powerful that it will eventually generate far more cash than it spends and will be able to pay for all the programming and other goodies it agreed to buy. Contrasting Netflix’s cash generation — or lack thereof — and the hard cash it owes in coming years is meant to illustrate the gamble Netflix is taking with investors’ money rather than its own.
Netflix has been able to splurge on hiring Hollywood stars and releasing a flood of new series and movies because the company has been able to borrow money cheaply. That long-term debt — which now stands at $6.5 billion — is how Netflix is expected to finance itself for several more years at least. Analysts at Bloomberg Intelligence say Netflix may look to sell about $2 billion in new bonds after it reports quarterly earnings on Monday. (The company also has $2.8 billion in cash sitting in its vaults.)
The more Netflix relies on borrowing to sustain its growth, the more pressure it faces to keep growing to make sure it can pay what it owes. That bet could turn out fine as long as Netflix continues to lure more customers to pay for its streaming video subscriptions and as long as investors are happy to lend Netflix money. The company has been transparent about its need to borrow money for the foreseeable future to pay its bills. Netflix has not, however, been forced to explain what it will do if those twin conditions of fast subscriber growth and easy-to-borrow cash should change.
Netflix is trying to capitalize on unique moments for both financial markets and consumer entertainment habits. With few easy ways to produce returns, investors have been happy to lend money to fast-growing, cash-burning companies. And Netflix is trying to seize on people’s willingness to turn to internet video to while away their leisure hours. Let’s hope it doesn’t take 100 years to know whether Netflix and its investors are making a savvy bet, or a ruinous one.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.